Judge Allows Lawsuit Against DraftKings
A judge has allowed a class-action lawsuit against DraftKings over its NFTs to proceed, claiming they should be considered unregistered securities.
A U.S. Judge has rejected DraftKings' motion to dismiss a class-action lawsuit filed by buyers of the company's Non-Fungible Tokens (NFTs). The lawsuit accuses DraftKings, its CEO, CFO, and president of selling NFTs that should be considered unregistered securities, violating federal securities laws.
In March 2023, Justin Dufoe filed a class action lawsuit against DraftKings, a sports betting and fantasy sports company. Dufoe argues that DraftKings' NFTs qualify as "investment contracts" under the Howey Test and should be regulated as securities.
DraftKings launched the 'DraftKings Marketplace' in 2021 on the Polygon Blockchain, offering digital collectibles related to sports, entertainment, and culture. The first NFT collection featured football player Tom Brady, with prices ranging from $12 to $1,500. Dufoe contends that these NFTs meet the criteria of securities under federal law and alleges that DraftKings knowingly sold unregistered securities, profiting significantly from their sales.
"Defendants knew the NFTs were 'securities' under federal and state laws and failed to register them," the complaint states, adding that DraftKings has earned or will earn hundreds of millions from these sales.
In October, DraftKings argued that their NFTs do not qualify as securities and are not subject to the Securities Act of 1933 or the Securities Exchange Act of 1934. On July 2, the U.S. District Court District of Massachusetts denied the motion, agreeing with the Plaintiff that DraftKings' NFTs could be considered investment contracts under the Howey Test.
Judge Denise J. Casper focused on whether the NFTs involved an investment in a common enterprise with an expectation of profits from others' efforts. The plaintiff alleged that revenue from NFT sales was reinvested into DraftKings' business, meeting the "horizontal commonality" requirement.
Dufoe also claimed that there was a reasonable expectation of profits from buying DraftKings NFTs. Lawyer Rob Freund explained this expectation was based on DraftKings' efforts to maintain investor interest and demand. The company's promotional activities encouraged customers to view the NFTs as investments.
The Plaintiff argued that the expected profits depended on DraftKings' efforts, not the efforts of the investors. The price of the NFTs was closely linked to the company's promotional activities.
The Court decided that determining the main factors behind the NFT market price is a factual question is not suitable for resolution at this stage. Therefore, the lawsuit will proceed, potentially impacting the legal status of NFTs and the broader industry. This ongoing legal battle highlights the complexities of NFTs and their classification under securities laws. The case could set important precedents for how NFTs are regulated and traded in the future.
The ruling against DraftKings' motion to dismiss underscores the importance of understanding the legal frameworks governing emerging technologies like NFTs. Companies in the NFT market will need to closely follow this case, as its outcomes could affect regulatory practices and business operations.
